Wednesday, May 9th, 2012
By Michael Lombardi, MBA for Profit Confidential
I’ve been highlighting over the last few months how a key indicator, stock selling by corporate insiders, has continued to rise as the stock market rally continued.
Why do we need to pay attention to what corporate insiders are doing? Corporate insiders are officers, directors and the largest shareholders of corporations. They have a deep understanding of their company, market and earnings outlook.
When corporate insiders are buying stock in the companies they work for, investors often think this is a key indicator to buy, as it may indicate that the company’s earnings outlook is improving. When insiders are selling, it could be a key indicator something is up, and so investors often consider selling.
Argus Research has just released its corporate insider sell-to-buy results for April 2012. In March, the insider sell-to-buy ratio was 5.77-to-1, which means that, for every 100 shares insiders bought, 577 shares were sold by insiders. In April, this key indicator deteriorated further to 6.56-to-1 (source: MarketWatch, March, 6, 2012).
The last time this key indicator had this high a reading was May 2011, which coincided with the last market top!
After two months of consistent and increasing corporate insider selling, a correction at the very least usually ensues, according to this key indicator.
Another company that follows corporate insiders, Trim Tabs Research, has seen its sell-to-buy insider ratio go from 5-to-1 in January to 15-to-1 in February, to 20.8-to-1 in March!
Corporations have been warning about their 2012 earnings outlook, as evidenced by the fact that corporate earnings growth has been slowing due to the global economic slowdown.
While some remain bullish on the prospect for higher stock prices, these key indicators of corporate insider selling are indicating that, if investors want to buy shares of corporations, corporate insiders are ready to sell their shares to them.
This is not a good sign on what has been historically a reliable key indicator. Given the earnings outlook for corporations for the remainder of 2012, I’d rather follow the corporate insiders, as I believe they know more about what is happening within their firms than the rest of us do.
The action in the gold bullion market was rocky yesterday. Here’s what my esteemed colleague Robert Appel, BA, BBL, LLB, has to say about gold:
“Yesterday, the $1,630-per-ounce pivot in gold bullion was broken to the downside. This coincides with massive problems in Europe and strength in the greenback. As a result, we expect the gold bullion complex to work even lower before finding solid support.
“By no coincidence, the ‘gold bashers’ have brought new talent to their CNBC road show, a spectacle in which they explain what a terrible investment gold bullion is!
“First Warren Buffett, now Bill Gates. This is in spite of the fact that, over the last 10 years, the price of gold bullion has outperformed both Berkshire Hathaway and Microsoft both! What is going on? On one level, clearly the chaos out of Europe is, indeed, chaos. As we have reported, the European Union, that ‘grand design’ from the ‘one-worlders,’ was a disaster.
“Welding together the economies, the habits, the social structures, and the currencies, of two cultures as far apart as Greece and Germany, for example, made no sense then—and makes no sense now.
“And the one thing all, repeat ALL, Western nations agree on is that they don’t need strong gold bullion right now to tempt buyers away from paper currencies, which are already in a death spiral, hence the massive selling at the paper level. (Note that we said ‘paper level’—as Eric Sprott, one of the largest players in the realm of physical gold bullion recently reported, there is an actual shortage of hard bullion at these prices for those who want delivery of the asset instead of the script).
“But, as with anything, you have to be careful what you wish for. A strong U.S. dollar will choke the already-fragile U.S. recovery to death, something that the boys on the Hill don’t want or need in an election year.
“So, amid the chaos, amid the confusion, our view is that the party is not over until it’s over. By the end of the summer, or early fall at the latest, we expect a spectacular recovery in the gold bullion complex. And we also expect the metal to return to the $1,630-per-ounce pivot sooner rather than later.”
Personally, I like to buy when the majority of investors are selling and sell when the majority of investors are buying. It is in that vein that I bought more gold-related investments yesterday. (Also see: Is the Bull Market in Gold Over?)
Where the Market Stands; Where it’s Headed:
It could have been much worse for the stock market yesterday. After all, most major European countries are back in recession. China’s economy is slowing. Japan is back at it…printing money again. And here in America we have a situation where jobs are not being creating and the central bank is buying government debt.
All this happening while the Dow Jones Industrial Average trades at 13,000…that’s 15 times our estimated earnings for stocks that trade in the index. Fifteen times earnings is a good number when earnings are growing…but not when corporate profits are stagnant, as they are today.
Since March 2009, I have been saying that we are in a bear market rally. My opinion remains unchanged. The rally has been extended by artificially low short-term interest rates, out-of-control government debt and money printing…events that cannot go on indefinitely.
The stock market is putting in a huge top here at which point the bear market rally will retire. (Also see: Proof Stock Market Rally’s Just an Old-fashioned Bear Trap.)
What He Said:
“The proof the party is over in the U.S.housing market could not be clearer to me. The price action of the new-home-builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up). Those who will hurt most when the air is finally let out of the housing market balloon will be those buyers who bought in late 2005. In fact, the latecomers to the U.S.housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in PROFIT CONFIDENTIAL, March 1, 2006. Michael started warning about the crisis coming in theU.S. real estate market right at the peak of the boom, now widely believed to be 2005.
|Total 2012 per share earnings for 30 stocks in the Dow Jones Industrial Average:||$900|
|Dow Jones Industrial Average Price/earnings multiple:||16.0|
|Dow Jones Industrial Average Dividend Yield:||2.5%|
|10-year U.S. Treasury Yield:||2.02%|
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